In addition to the plethora of proprietary reverse mortgage products that have started to become increasingly prevalent in the industry, there have also been a series of products that allow some homeowners to tap the equity in their homes without relying on a debt-based loan. The increasing availability of alternative equity tapping tools – including sale leaseback products and shared appreciation investments – could actually bode well for the reverse mortgage industry, according to legal experts.
In the past 12 months, alternative equity tapping products like the shared equity product from Point, the sale leaseback from EasyKnock and the HELOC alternative Figure Home Equity Loan have all come to market.
“In the category of [alternative] equity release products, there’s both an evolution and revolution going on,” said Jim Brodsky, partner at law firm Weiner Brodsky Kider PC in a presentation at the National Reverse Mortgage Lenders Association (NRMLA) Eastern Regional Meeting in New York in May. “The main distinction from our point of view is that it depends on whether the consumer owns the home and seeks to unlock the equity within it, and the [other type of] consumer who doesn’t own the home but wants to unlock its equity.”
That second type of consumer needs to first acquire the home in order to tap into its equity, Brodsky said.
“The creative juice between [reverse mortgages and alternative products] is liberating the equity of a home.”
Why alternative products don’t compete with reverse mortgages
“The products we’ll talk about are equity-based, and not debt-based,” said Jim Milano, fellow partner of law firm Weiner Brodsky Kider PC. “Products like these would certainly work for an elderly person, couple or household, but there are no age limits. They’re not looking to compete with reverse mortgages. In fact, when you talk to a lot of these companies… many even say upfront that they don’t want to compete with reverse mortgages.”
Additionally, most of the companies operate on a relatively small scale when compared with the reverse mortgage market, Milano said. .
“One company I went to visit a couple of years ago were originating 3,000 contracts in a year, and they were ecstatic. This was a big deal for them,” Milano said. “For these folks, even with higher value contracts, that’s a big deal. For five or more years, the people running these alternative equity companies have offers of $50-100 million to deploy and invest. They have so much money being offered to them that they can’t take it all.”
The trend being established in the alternative equity tapping market right now likely bodes well for the reverse mortgage industry, a more niche market, Milano said.
“I think the main takeaway for us is that we certainly think this trend bodes well for the reverse mortgage industry. These products are analogous to reverse mortgages [in the sense that] it’s equity access or release, there are no monthly payments, but what they’re investing for is a share of the appreciation of the home,” he said.
The very different legal and regulatory mechanisms that govern both loan products and investments means that reverse mortgages operate in one area, while alternative equity tapping options for consumers operate in a different area. The presence of both are contributing to the expanding conversations surrounding the employment of a home’s equity in allowing more financial stability for each product type’s customers.
Why alternative products do compete with reverse mortgages
Regardless of whether equity-tapping alternatives see themselves as direct competitors, they may be hard-pressed to separate themselves entirely from the reverse mortgage market, which will inevitably breed comparisons between the two product types.
“A reverse mortgage is one solution for people that don’t have cash-flow,” said Matthew Sullivan, co-founder and CEO of alternative equity tapping company QuantmRE in a January interview with RMD. “What we’re saying is that we now have another solution for people that don’t want to increase their debt, or for the people that don’t qualify [for a reverse mortgage]. So, what we’re doing even then is competing.”
However, while Sullivan may see that QuantmRE is a de facto competitor with companies offering reverse mortgages, he says that having more products dedicated to home equity tapping will raise the stature of all who operate in the space.
“If we can expand the overall understanding with homeowners that their equity is not something that is dead any longer, and that technology and legislation is now enabling that to become more liquid, then the market will expand. And then, it will benefit everybody within our sector,” Sullivan said.
Sale leaseback firm EasyKnock, on the other hand, views itself as an alternative for those who may not qualify for a reverse mortgage, and actively seeks to partner with those who offer reverse mortgages to allow some service for potential borrowers who may fall through the proverbial “cracks.”
“If someone can get a reverse mortgage or a HELOC, we always tell them to do it because it’s better for them,” said EasyKnock CEO Jarred Kessler in a late-2018 interview with RMD. He went on to add that his company had actually paid for referrals from forward and reverse mortgage lenders. “Loan officers are looking for new streams of revenue with rates rising. We are not looking to compete with them, but to help them by servicing their turn-downs.”
Safety of reverse mortgages vs. alternative equity tapping
Potential customers looking to tap the equity in their homes are likely to examine the safety of each option available to them. The involvement of the U.S. government in the Home Equity Conversion Mortgage (HECM) program has necessitated more clearly-defined safeguards for its customers, which likely resonates with seniors according to reverse mortgage originators.
“Every one of my conversations with potential clients, at some point, touches [the non-recourse feature],” said Rich Pinnell, originator with Guild Mortgage in a February interview. “They all want to know, are their kids going to be responsible if the house is upside down? I don’t think we would have even 50 percent of the reverses we have now if that component was not in place.”
Since the HECM product also has the benefit of over 30 years in being perfected by both the government and by the market, that also allows it to have an advantage over alternative tools according to Scott Harmes, national manager of the C2 Reverse Division at C2 Financial Corp in San Diego, Calif.
“We now have 30 years of product testing and market revision to get to what is, today, an exceptional and unique financial product when used in the right application,” Harmes told RMD, also in February. “Over the last five years we’ve seen equity conversion methods come and go, because they’re not market-proven or market refined long-term. That long history of HECM refinement is why we have such a viable product today.”
More equity tapping tools are good for everyone
The operation of alternative equity tapping products and the potentially wider array of age groups it can serve allows those offerings to serve alongside reverse mortgage companies while serving the similar needs of each product’s customers.
“We see a wide variety of customer profiles,” said Eddie Lim co-founder and CEO of alternative equity company Point in a March interview with RMD. “Couples in their 40’s and 50’s looking for a cashflow-friendly debt payoff solution; the recent homebuyers looking to make some home improvements; the folks approaching retirement who might want to bridge into a reverse mortgage; [or] the entrepreneur looking for financing free of monthly payments to bootstrap their new business to profitability. These are all common use-cases.”
Reiterating why the presence of these companies can likely be viewed as positive for the reverse mortgage industry, Milano reiterated at the NRMLA Eastern Regional Meeting the fact that many of the alternative equity tapping products out in the market don’t have an age limit.
“[Without an age limit], they’re not trying to compete with reverse mortgages. It’s a trend, there’s a huge investment appetite, we think all of this bodes very well for [the reverse mortgage] industry.”
This edition of the RMD Report is sponsored by national appraisal management company Class Valuation.